In a veiled threat, the energy giant Enron has raised the spectre of US sanctions against India in its dispute over the $2.9bn Dabhol power plant project.

Following an interview with Enron chairman Kenneth Lay, the Financial Times reported that Enron wanted US sanctions against India if the company did not get back the $1bn it had spent on building the plant.

The company later tried to qualify and play down Mr Lay's statement, saying that it had not lodged a formal complaint with the US government.

Possibly responding to the pressure, the Indian government has begun moves to resolve the dispute, one of the bitterest in international business.

Can't pay, won't pay

Enron launched arbitration proceedings this year, after the plant's only client, the Maharashtra regional electricity utility, refused to pay its bills.

Mr Lay had told the Financial Times that "there are US laws that could prevent the US government
from providing any aid or assistance or other things to India
going forward if, in fact, they expropriate property of US
companies."

Mr Lay said that non-payment of bills effectively constituted an expropriation.

Enron denial

But the firm said that this did not mean that sanctions had been applied for, nor had a formal complaint been lodged.

An Enron spokesman said he was confident that the Indian government would move to resolve the dispute, without the need for punitive measures.

Later on Friday, Indian media reported that the government had given financial institutions two weeks to develop a plan to resolve the dispute.

Finance secretary Ajit Kumar reportedly met representatives of the Industrial Development Bank of India and other banks, and set the deadline for a plan to avoid the case ending up in an international arbitration court.

Trade ties

Mr Lay's reported remarks will prove embarrassing both to Washington and Delhi, which have striven to improve ties in recent months.

In July, the US government hinted that existing sanctions against India, imposed as a result of India's nuclear-testing programme, could soon be lifted.

The US also recently granted India a range of free-trade privileges, in the hope of winning its support ahead of a fresh round of global trade talks.

Price problems

The dispute centres on the high price charged by Dabhol.

Maharashtra officials say the cost of power supplied by Enron is nearly double the tariff charged by Indian power producers, and used it as an excuse to stop paying state debts to the plant.

Enron maintains that its costs are higher because Dabhol is a state-of-the art facility, and because the regional electricity board is not utilising the plant's intended capacity.

Earlier this year, the Indian government announced that Enron had agreed to cut its tariffs.

But the news did not defuse the dispute, which has developed into one of the bitterest rows in international business.